Beating the Odds – Achieving Post-Transaction Satisfaction
- May 10, 2022
- Alan Wink
Lisë Stewart and Alan Wink discuss some of the important steps—such as conducting prior planning and having the best transaction team possible—to achieve that selling some or all of your business is a positive experience.
Lisë Stewart:Hello everyone. My name is Lisë Stewart and I'm here with my colleague, Alan Wink. This is the third video in our EisnerAmper Selling Your Business Series. We're going to be talking today about some things that build upon some of the concepts we've talked about before. We've already covered things that buyers need to think about when they're considering buying a business and things that sellers should think about and prepare for as they go through the process. Today we want to share some of the ideas for those who have successfully sold all or part of their business.
You know, for some people, in fact, many people selling their business is really exciting and it's very rewarding, but there are others who end up being disappointed, frustrated, it just doesn't go the way that they expected. In fact, I think we've actually quoted this before, Alan, that approximately 80% of people who sell their businesses and it just doesn't meet their expectations. So Alan and I know that you've seen a lot of these deals sort of play out, and I'm curious, what are some of the surprises that you see or hear about that perhaps people need to know or think a little bit more about?
Alan Wink:It's a great question Lisë. You know, it's funny. Seller's remorse is very common. And you go through the sales process, you sell your business what you think it's worth. All of a sudden, you wake up the day after the deal's done and sometimes you don't have an office to go to. And you just have a little bit remorse, "Did I do the right thing? How am I going to stay busy? What am I going to do with the rest of my life?" There's also the other angle in that so many deals are structured with an earn-out provision where the seller gets a certain amount of money at closing and there's an earn-out that they get over the next year or two based upon the achievement of certain milestones. The one thing that the seller has to realize is that in earning those earn-out payments, those milestone payments, they are not in control of the business anymore. They don't make the day to day decisions.
Some cases they might have an employment contract for a couple of years where now they're working for someone else. A lot of sellers get frustrated when they're not the key decision maker anymore, when they have to report to someone else, when someone else second guesses their decisions. So I always tell sellers that if you're happy with the amount of money that you receive at closing, it's probably a good deal for you financially. If the deal price that satisfies you needs to include those earn-outs, maybe you need to structure it differently because in so many cases, for many, many reasons, the seller doesn't get those earn-out payments.
LS:Right. I completely agree. I've seen that play out a number of times. I think sometimes the sellers just don't realize how hard it is to give up that sort of sense of control and watch somebody else take over their baby, so I think that's really wise advice. I've seen some examples too that just catch our sellers unprepared, and that's when a family business sells. In that case, I've seen instances where family members, particularly children and even extended family members, get very excited about the upcoming sale and they start thinking about the amount of money that they might also get out of this. And if the owners haven't really made it clear what they intend to do with that money and what it might mean and how it may benefit others, that difference in expectations can really blow up and cause a lot of conflict.
I find it so sad sometimes that just at the time of life when owners, people who have led companies and worked really hard should be celebrating their good fortune and figuring out what it is that they want to do for the rest of their lives, they find that they are going to battles against their own children who are demanding more from the sale, or really felt like somehow they should be reimbursed for all the years where they watched their parents work really hard and maybe their parents couldn't be quite as involved in their lives and so on. So it can open up old wounds and can make it very difficult to be able to move forward and enjoy that next phase of life. So when I'm working with businesses that are looking to sell, I always think it's a good example to sit down with the other people in your lives who may have some expectations and talk about what do you intend to do with that money?
What are you expecting is really going to be the end result after all the taxes are paid, after all the professional advisors are paid? And the amount of money that perhaps you want to donate to charity, invest in other ways, what's really left and what do you intend to do with it, and what can family members expect? I recently had a family business that sold and the owners, a husband and wife team, had done very well and then within two to three days of the sale closing, there was a cousin and a brother-in-law that just came forward and were starting to say how badly they needed money for their own lives. Again, it caused a rift and it was very difficult to deal with those expectations. So think about those sorts of things ahead of time and therefore it won't be as big a surprise.
AW:You know, I'm involved in a similar situation right now with a family-run business and I really have to agree with you at 150% that all the family members need to understand what they're going to get out of the deal. You know, you could have situations where certain family members already have equity in the company, but there are also some family members that might have been from a newer generation that are making nice salaries every day. And it's a family run business, they feel like they're contributing, but also they want to be compensated as if they were an owner. So I think you want to make sure that every family owner understands what they're going to get when the business is sold. I know you work with many, many family businesses and family businesses are tough to sell, because those family members, that's the only thing they really knew.
They spent their entire lives and it could have been going back two or three generations in the family, and that was the identity of the family and sometimes when the business is sold, that identity goes away. Then there's usually a lot of remorse in those cases, "Did I sell the business at the right time? Was it the right thing to do? My son and daughter, wanted to spend more time in the business, maybe I shouldn't have sold." Also you see a lot of family business sales where the new generation signs an employment contract, even the father or grandfather, mother or grandmother, is not running the company anymore but now they're working for the new buyer and you see that quite often.
LS:Right. Yeah, exactly, and I agree. There's a lot of emotion. I think that there's more emotion involved in the sale of a business, particularly when you've got more family members that are involved. Helping people to prepare and to think about that, I think, is key to making sure that then the next phase, when they've actually gone through the sale and it's been successful can be joyful. So let's talk a little bit about the positive side, so what are some of the things that you are seeing out there? What are people doing once they have completed the sale and they've got cash? What's a good scenario that you can tell us about?
AW:Well, it's funny. I think the most important thing is that people just decompress after the deal's done. Private business owners spend their entire lives building this business, they're shooting for that exit, know it's the pot of gold at the end of the rainbow. I think business owners that sell successfully take the time to try to figure out what's next. They might take a vacation for three months, go tour Europe, take an extended vacation they never allowed to take when they were running the business. Even more importantly, even if they ran a company they could get away for a couple of weeks on vacation, now they don't have to worry about the text messages and the emails and returning phone calls. It's a chance really to relax and sit down and kind of write down what your personal goals are. I see people that spend a year and then they start a new business or they invest in a business and become part of the management team.
You see a lot of people join not-for-profit boards or get involved in charity work. They want to give back. I actually sit on the board of two angel groups, one in New Jersey and one in Philadelphia and each of these groups is comprised of 30 to 40 high net worth individuals who have run businesses and sold businesses and they want to give back. They want to give back to the entrepreneurial community and they do that by investing money in these early stage companies and also giving these young entrepreneurs their expertise. It really is a great match, and I know a lot of private business owners that have sold and have invested in 10, 12 seed or pre-seed companies and has had a wonderful time working with those entrepreneurs, building their businesses. It really re-energizes them. So I think there's a lot of interesting things that people can do once they cash out. And the good news is they can afford to do it because now they have a lot of money in the bank.
LS:It's true. You know, it brings a lot of joy both to them and to the people that they interact with. And not only are they sharing their wealth by investing in other companies, but they share their experiences. I think it's wonderful when people that have been through this can become mentors for the next generation of business owners and inspire that growth, so I think it's a win-win for everybody. I think it does go back though to just some of the things that we've said all through this entire series and that is you need to plan, you really need to know what you're up against, you need to know what all the different aspects of the situation might be, you need to do your tax planning prior to the sale of the business. There's a lot that goes into it. So I think one of the last things I want to leave our listeners with is who should be on that team? Who should they be surrounding themselves with to make sure that this is really a positive experience for everybody? I know I've got a few ideas, but if you were going to put together a dream team, Alan, what specialist would you put on that team?
AW:Before I answer that question, I want to add one other thing because when you sell your business, and I'm sure you've heard this many times, it's not what you sell it for, it's what you keep. I would tell you probably, especially the less sophisticated business owners, you hear it closing, "Boy, I thought I was going to get a lot more money than this, what happened?" And I think it gets back to if you have the right team around you and establishing that team early, I think you're going to walk away from the table with much more money than you thought. If you ask about the dream team, I think you know number one is an outstanding accounting and tax advisor. So you can begin to plan for the eventual event of that exit. So it's not like you decide tomorrow, and you're selling your business or planning that goes into it.
You want to make sure you have a great attorney, someone who's accustomed to doing middle market corporate finance deals that can help you as you're negotiating letters of intent and negotiating agreements for sale and things like that and possibly your employment contract. That is so critical that you have an attorney alongside of you that has done deals of this size and of this nature. If you're going to hire an investment banker to represent you, hire a banker who specializes in deals of your size. Most investment bankers work on a contingent basis so they get paid once the closing takes place, make sure a deal of your size gets the attention of your banker. That's really, really important. I also think part of the team has to be your family, who have to give you the blessing that you're doing the right thing. Because when this is all over, you're going to be spending a lot more time with them and I think that's even more important in a family-run business; that family's got to be part of your team.
LS:I agree and I just have to put in a little plug here for a family business advisor, because part of what we and our team, our colleagues, anybody who's in this field knows is that managing those conversations, making sure that they take place, helping to minimize conflict while really increasing understanding is it's an art form. It can be very difficult to do on your own, so just having somebody on your team that can help you to navigate through some of those challenging conversations can save you a lot of heartache later on.
AW:We're talking about this earlier. I think one of the other things that you really should plan about is where are you going to live? There are certain states in this country that don't have state income tax, and a lot of people decide a couple years before they want to retire that I'm going to relocate to one of those states where I don't have to worry about paying a state income tax. I mean, if you live in New Jersey and you sell your business and you move to Florida where there's no state income tax, you save over 9% of the transaction in taxes. So it's what you keep and you can't make that... You have to plan for that decision, you have to establish your residency a couple of years in advance. Then you also have to realize if you're going to live in Florida and New Jersey, you have to be in Florida more than 180 days a year to be a state resident there. So you have to plan your travel schedule that you're in the state more than 180 days. It takes a little bit of planning, but you can save an awful lot of money.
LS:Right. Yep. And there is that magic word again, planning, you really got to do the planning. So I just want to make sure that for everybody who's been tuning into this series, we really enjoy talking about the subject and I think we've just scratched the surface. If you'd like more information and want to hear the rest of the videos as well, please just visit eisneramper.com/sell. We hope you've enjoyed it and we hope to see you next time. Thank you, Alan. Once again, great job. Thanks.
Transcribed by Rev.com
Beyond the Magic Number – What to Plan for When Anticipating an M&A
Hitting the Right Number on an M&A Deal
What's on Your Mind?
Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.
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